Inflation Rate is 5.6%... and Other Nonsenseby
Vin Suprynowicz I’m a coin collector, in a small way. British issues of the late 18th and early 19th centuries, mostly: Pistrucci, the Wyons – apogee of the engraver’s art. To determine the market value of such coins, advanced collectors keep up to date on current auctions, stuff like that. But as a starting point, the standard pricing guide is the hefty softcover catalog still generally known as the Krause, after original author Chester L. Krause. My “19th century” Krause is a Fifth Edition, published in 2004 – which means it was prepared for press five years ago. I always advise those using such a catalog to consult the box on the copyright page, where the publishers reveal the bullion values for gold and silver which prevailed when the catalog was compiled. Expressed in dollars, the prices of gold and silver coins must be adjusted to account for shifts in bullion prices over time. I happened to be reading that box over the weekend. The numbers were quite revealing. Coin values in my 2004 Krause were based on then-prevailing bullion prices of $400 per ounce for gold; $6.50 per ounce for silver. Despite bullion prices having tumbled considerably in recent weeks, gold is currently running $800 an ounce; silver $13 an ounce. That’s what a gambler or stock investor would call “a perfect double.” Is that because half the world’s gold and silver mines suddenly shut down, or because demand for gold and silver has suddenly skyrocketed? No. Supply and demand haven’t shifted much, if at all. In fact, the value of gold and silver haven’t shifted much in the past five years, either. An ounce of gold or silver will still buy you about as much stuff as it would in 2003 or 2004. What’s happened is that the value of the Federal Reserve so-called “dollar” notes in which these metals are denominated has fallen neatly in half. It’s called inflation. The government tries to pretend that figuring out the rate of inflation is an arcane and complicated business, involving the measurement of price increases for peanut butter and bananas, for gasoline and heating oil and apartment rents and personal computers, after which the differentials for each of the items in this “market basket” has to be assigned a certain “weight,” et complicated cetera. This mumbo jumbo is nonsense. Rising prices don’t cause inflation; they’re a time-delayed symptom of inflation. Any economist can tell you that inflation is the rate of increase in the money supply. The Federal Reserve and the Treasury Department and the Bureau of Engraving and Printing know down to the zinc cent how many new dollars rolled off the presses – or were created as new digital blips in their computers – since 2004. And, I submit, they’re lying about it – or allowing others to do so for them. The Department of Labor reported last week that the current 12-month rate of inflation is 5.6 percent – highest rate recorded since 1991. America’s newspapers and TV networks reported that as gospel. But even if that “high” rate of 5.6 percent had prevailed in every year since my Krause was prepared in 2003 for publication in 2004, gold should now be at only about $525; silver at about $8.54. (Gasoline – $1.90 per gallon in 2003 – should still be only $2.50, not $3.85. To allow for “compounding,” use the handy computer. In fact, for prices of such widely traded commodities as gold and silver and gasoline to have doubled – when measured in fiat dollars – over a period of five years, the real rate of inflation has to be something more on the order of 15 percent per year (compounded); three times what the government claims. And that’s an average – it could be even higher right now. This tracks perfectly with what a number of hard-money sources on the Internet have been reporting for the past eight months – that in order to funnel them in wink-and-nudge “loans” to their friends at the big investment banks that would otherwise have to roll belly-up based on the overvalued bad mortgages in their portfolios, the Fed has been creating new “dollars” at an annualized rate of 15 to 17 percent all year. (We’d know precisely if the Fed still reported the M3 money supply. They stopped providing that number in 2006. Wonder why?) This purposeful inflation (watch for the euphemism “liquidity injection”) has created a “cheap dollar” that makes American prices look like bargains to foreign tourists (reversing the trend of the 20th century), but which reduces our own standard of living, and which is particularly insidious in eroding the value of the bank accounts of those who foolishly “played by the rules; worked and saved.” Why would government lie to us about this? First, they’re locked into all kinds of “Cost of Living Adjustments” for government workers, Social Security recipients, etc. If they admitted inflation was 16 percent, they’d have to give everyone a 16 percent raise this year, another 16 percent next year, a third 16 percent raise in 2010 – which adds up not to 48 percent, but to 56 percent, compounding even more in the fourth and fifth years. Bankruptcy would suddenly look much closer. But there’s a far more important reason. If you believe inflation is 5.6 percent, choosing between a “low-risk” bank savings account that promises a 5 or 6 percent return, and a “higher-risk” stock market investment promising an 8 or 9 percent rate of return (remember, “Big Oil” is demonized today for earning “outrageous, windfall” 7 percent profits), seems like a reasonable exercise. But faced with a 16 percent rate of inflation, such choices are a joke. Either “choice” will net you a hefty annual loss – most of your buying power will be gone in 10 to 15 years. At that point, the only kinds of “investments” that still make sense are those that offer “returns on investment” generally associated with drug dealing and playing the Megabucks.
Americans may have little choice – our 401(k) providers are reluctant to allow us to invest sizeable sums in Vietnamese shrimp farms or Siberian platinum mines. But the Asians and Arabs who own a lot of America’s IOUs are free to pull their money out of U.S. paper and invest it elsewhere. What do you suppose will happen when they do that? August 26, 2008 Vin Suprynowicz [send him mail] is assistant editorial page editor of the daily Las Vegas Review-Journal and author of The Black Arrow. Copyright © 2008 Vin Suprynowicz
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